Sunday, April 21, 2013

Not Waving But Drowning

Apologies for lack of posts. Denham Senior has been hospitalised with a serious heart condition and blogging has therefore moved to the back seat. But today's report from the Royal College of Nursing just has to be clocked.

According to their latest survey, NHS nurses are still "drowning in a sea of paperwork". Nearly one day in five is spent filling in forms, ticking boxes and ordering supplies. RCN general secretary Peter Carter says:
"These figures prove what a shocking amount of a nurse's time is being wasted on unnecessary paperwork and bureaucracy. Yes, some paperwork is essential and nurses will continue to do this, but patients want their nurses by their bedside, not ticking boxes."
Yes, indeed. And visiting Dad in two NHS hospitals over the last several weeks we've been able to study the process up close and personal.

The first stop was a large acute hospital just beyond the M25. It suffers all the usual problems: decrepit buildings, huge financial deficit, and a chronic - and I do mean chronic - lack of parking for visitors. Admission even for blue light emergencies like Dad is via a 12 hour plus trolley wait in A&E, and once finally admitted, care is in the hands of those overstretched uncontactable doctors. The nurses spend huge amounts of time behind the counter filling in forms rather than being out on the ward with patients, and you virtually have to book an appointment for one to stop by your bed. The whole impression is of an operation struggling barely to keep its head above water.

The second stop was one of Britain's top specialist heart hospitals, and it is much more impressive. What's done there in terms of heart surgery is truly world class, and its clinical staff are the business. The doctors are top notch, and the nurses do real nursing (Dad even attempted to take one home with him). Morale seems high, with junior nurses actually on first name terms with the top consultants. True, it's clear that staffing ratios are higher than in the general hospital, but much more striking is the excellent attitude and commitment of staff members.

Yet even here, the nurses told Dad they have a complaint. It isn't the hours, or the inconvenient shifts, or the stressful sometimes stomach-churning work, or even the pay. Their number one complaint is excessive paperwork. And even though they don't let it interfere with patient care, we watched them filling in great piles of paper in every spare moment.

So what's it all for? Why do we need all this paper?

Back in the dark days of the Commissariat, much of it was to satisfy the central planners that patient pathways were being rigorously followed, that prescribed risk assessments were being fully documented, and that every bedpan could be duly accounted for. Or rather, to provide a full audit trail which could be filed away to protect bureaucratic backsides in the event of a system malfunction.

But surely we're now three years on from all that. Surely we don't need all that now?

It's not that Jezza Hunt isn't aware of the problem. He's told us before of the million nursing hours a week spent on form filling rather than caring for patients. Of the nurse who had to fill in a 22 page form and 10 additional forms to get a desperately ill patient admitted to a trauma ward. And of the Hospital Trusts who have to report to, and comply with, 60 different regulatory, licensing, commissioning and public scrutiny authorities. Why, he's even ordered a review of NHS bureaucracy.

But he's attempting to tame a monster. The NHS is far too big, and the bureaucracy far too entrenched, for one single weedy minister to prevail.

The only way of getting on top is to break it up, give us choice and competition, and allow the hospitals themselves to find ways of managing their own affairs. They must be held accountable for results, not for how many boxes their nurses have ticked.

Wednesday, April 10, 2013

More Jobs As Welfare

Watch the vid (if you can) and then check out the bile in the YT comments

For those of us who believe Margaret Thatcher rescued Britain from a 50 year spiral of economic decline, the bile still directed at her from the left is hard to stomach. Surely these people can now see how there really was no alternative. Surely they realise that the vast majority of us are much better off because of the changes she bulldozed through. And they must at least understand that our public services have benefited from our higher level of general prosperity.

But no. Just as the Greeks blame the Germans for their economic reality check, much of Britain still blames Thatcher.

One of the most emotive charges against her is that she vindictively crushed the miners and smashed their communities into dust. That she provoked them into a strike and then refused to countenance any settlement other than their abject and unconditional surrender - a surrender immediately followed by mass closures and redundancies.

And it's certainly true that the numbers of mines and miners were slashed under Thatcher. in 1980 there were 211 coal mines and 230,000 miners. By 1990 the numbers had fallen to 65 and 57,000 respectively (see here).  We can see why the mining communities felt as if they had been punished by the nasty vengeful Tories.

But the strike and its aftermath didn't appear out of a clear blue sky. There was a lot of history.

To begin with, coal mining had been in steep decline for decades before Thatcher, and employment was only around one-fifth of its peak. Just in the previous 20 years the number of both mines and miners had fallen by two-thirds, with most of the cuts taking place under Labour governments. In fact there were more mine closures and job losses under Harold Wilson than under Margaret Thatcher.

And that's because British coal mining was inefficient, uncompetitive, and increasingly expensive. It may have fuelled the industrial revolution and Victorian Britain, but much cheaper alternatives were now available. The industry was only kept going by being taken into state ownership and propped up by massive subsidies, including rigged prices for supplying our coal-fired power stations. Taxpayers and electricity consumers - including our vital manufacturing industries - were being forced to pay through the nose for one of life's essentials.

On top of that, by the 1980s the miners had established for themselves a shameful record of industrial blackmail. There had been two prolonged national pay strikes in the early 1970s, necessitating extensive power cuts and a three day working week imposed to eke out supplies. The entire nation had suffered at the hands of the miners and their militant union bosses, and by bringing down the Heath government in 1974 they had shown its successors who was really in charge. They had lived by the sword, so could hardly complain when it was turned back on them.

The reality was that by the 1980s, the British coal industry had become too expensive and too unreliable to survive.

Of course, in the romantic fantasies woven by people like Billy Bragg, none of that matters. Thatcher's crime was to destroy the lives of miners and their families, and - according to their myth - to do so with the cruellest of capitalist smiles playing across her lips. If she'd possessed one ounce of humanity she would have supported the miners and nurtured their noble way of life. She'd have found the money to keep the jobs going by taxing the idle rich.

We've blogged before about public sector jobs as welfare, and by the 1980s most mining jobs had become precisely that. They had become economically unviable, and increasingly depended on taxes and subsidies grabbed from the rest of society. Moreover, whereas five-day-coodinators and most of the other public sector non-jobs are at least safe occupations, mining is not. We were subsiding people to do dirty and dangerous work that we no longer needed.

The tragedy is that so few of these ex-mining areas have developed alternative sources of prosperity. Decades after the mines were closed, unemployment remains high and for far too many, one form of welfare dependency has been replaced by another. As we've blogged before, we think the solution is to radically improve tax incentives in those areas - something we'll come back to.

PS We've met St Billy several times on BOM - start here.

Monday, April 08, 2013

Bring Me My Pot Of Gold

We've got stacks of these

The fundamental reason we have to cut the welfare bill is because we can't afford it. At 16% of GDP and growing, we simply have to get a grip. And of course, the decisions are difficult, and the consequences for some individuals can seem harsh. But we just can't go on as we are.

Or can we?

Over the last week we've heard a lot about pots of gold that could pay our welfare bill without having to inflict cuts on the poor. Here are three of them, all heavily promoted by our friends at the BBC:
  1. If the government would just swallow its Plan A pride and get people back to Plan B work, the welfare bill would fall and there'd be loads more tax revenue coming in. The problem would solve itself.
  2. We could reverse the tax cut for millionaires, using the extra revenue to safeguard benefits.
  3. We could clamp down on corporate tax avoidance and get tens of billions more revenue. 
Pot One - traditional Keynesian pump-priming - is a seductive idea, but as Andrew Lilico points out today, with the government stuck on a £120bn pa deficit it doesn't offer a credible way forward. In effect, we've already been trying Plan B ever since the Crash and it hasn't worked. 

As for the idea that increases in public spending can be self-funding through their impact on GDP and tax revenues, that's akin to plans for a perpetual motion machine. Estimates of the actual impact vary, but the Office for Budget Responsibility reckons that an extra Pound of public spending boosts GDP by between 60 and 100 pence, depending on the type of spending (capital spending works much better than welfare spending). But since the amount that comes back as tax revenue will be less - perhaps 20 to 40 pence - the government's deficit is left 60 to 80 pence higher.  There are no magic pots of gold here.

Pot Two sounds even more attractive to most of us - reverse the millionaire's tax cut and pay the welfare bill without whacking the rest of us on incomes below £150k. 

Again though, the numbers don't stack up. According to the official HMRC analysis, increasing the top rate of tax from 40% to 50% raised much less than the £2.5bn pa originally promised by Labour. HMRC says:
"The conclusion that can be drawn... is that the underlying yield from the additional rate is much lower than originally forecast (yielding around £1 billion or less), and that it is quite possible that it could be negative. This conclusion is supported by wider academic literature which generally suggests a greater behavioural response than was included in the Budget 2009 and March Budget 2010 estimates. Evidence from the U.S. suggests the behavioural responses could be even higher, with an even lower yield."
The problem is that golden geese no longer hang around waiting to be plucked: faced with a punitive hike in tax rates they find ways of reducing their taxable income, possibly flying away entirely. Between 2009-10 and 2010-11, faced with a tax hike from 40% to 50%, they reduced their incomes by 25%:

Moreover, the longer-term damage to the economy is likely to be even greater, as entrepreneurial types leave for sunnier, lower tax climes. And as the economy suffers, revenue from other taxes also sags. HMRC says:
"High tax rates in the UK make its tax system less competitive and make it a less attractive place to start, finance and grow a business. The longer the additional rate remains in place the more people are likely to consider it a permanent feature of the UK tax system and the more damaging it would be for competitiveness. This suggests the negative impact on GDP may increase over time, and therefore the direct yield (and revenues from other tax bases) might fall over time toward or beyond zero."
In today's globalised high mobility economy, higher tax rates for millionaires are very far from being our pot of gold: in fact, they can easily turn out to be the exact opposite.

Pot Three - clamping down on tax avoidance by the likes of Starbucks - is widely trailed, and also sounds painlessly attractive to the rest of us. Because according to some estimates, the tax gap between what big companies ought to pay according to the spirit of the law, and what they actually pay, runs into tens of billions annually.

But once again, the reality is somewhat different. According again to HMRC, the tax gap for companies is only around £4bn pa, which while worth having, is nowhere even close to the £200bn plus we spend on welfare. Moreover, tax avoidance is an exceptionally grey area, and one man's tax avoidance is another's perfectly legitimate protection of shareholder interests.

And that pesky globalised economy makes it virtually impossible for one country acting alone to do much about it. Indeed, over the long-term governments may well have to phase out their taxation of multinational companies altogether. They may have to rely on taxing company earnings only when they distributed back to their own resident shareholders (which is how it was done originally back in Victorian times).

So three pots of gold that turn out to contain little but wishful thinking.

The only way of making welfare affordable is to cut it. Or more specifically, to tighten up on eligibility and to focus what cash we can afford on those who need it most. The painful choices are unavoidable.

PS Going back to that global savings glut and the role of those high saving Chinese, I was fascinated to read this account in the English version of the People's Daily. Not so much for the story itself, but for the accompanying list of the PD's most popular articles. Nothing to do with savings, or lack of welfare provision, or say, the shenanigans next-door in North Korea. No, the most popular article right now - complete with pic - is "Bogus sexy cop charged":
"A model who impersonated a police officer, posting sexy photos of herself online, has been given a suspended jail sentence at Fengtai district court for cheating and bluffing, which damaged the image of government officials, the Beijing Times reported Tuesday. The woman, 23, surnamed Wang, posted sexy photos on her microblog in July, including one in which she was pulling on black stockings while wearing a police shirt. She also wrote that as a policewoman, she has so much pressure because she has to dine with government officials every day."
Do they have April Fools Day in China? What would the Great Helmsman have said? What isn't clear is whether the article is meant as a warning to other microblogging bogus sexy cops, or whether the PD thinks those government officials need to chill. Of course, our own cops are perfectly capable of cheating and bluffing all alone without any help from bogus ones - as we've seen in the Mitchell case.

Saturday, April 06, 2013

Incompetent And Reckless Bankers

"An apology is due for the incompetent and reckless Board strategy; merely apologising for having failed to plan for an unforeseeable event is not much of an apology."
The Parliamentary Commission on Banking Standards has given the HBOS Three a richly deserved public roasting:
"In the view of this Commission, it is right and proper that the primary responsibility for the downfall of HBOS should rest with Sir James Crosby, architect of the strategy that set the course for disaster, with Andy Hornby, who proved unable or unwilling to change course, and Lord Stevenson, who presided over the bank’s board from its birth to its death. Lord Stevenson, in particular, has shown himself incapable of facing the realities of what placed the bank in jeopardy from that time until now."
The Commission reckons none of the three are fit and proper persons to work in the UK financial sector, and given the disaster they've visited on us, they should rightly be broken to the ranks. We trusted them with our savings and they gave us financial Armageddon.

But of course, when it comes to incompetent and reckless bank strategies, the HBOS Three were hardly alone. It's now clear that during the bubble years large swathes of the banking sector were following a similar course. And even worse, it didn't end with the Crash.

Take Britain's most important bank. For the last four years it's been pursuing a strategy which by all previous tenets of sound banking practice has been reckless in the extreme. It's pumped up its balance sheet with assets of dubious long-term value, repeatedly glossed over its failure to achieve its key performance objective, and has just replaced its failed CEO with an outsider who, far from calling a halt, seems set on behaving even more recklessly.

Yes, the Bank of England now owns one-third of HMG's dodgy National Debt (purchased at the top of the market and denominated in a rapidly devaluing currency), has spectacularly failed to keep inflation down to 2%, and has headhunted a new Governor who's ready to let rip.

Our savings are being incinerated at an alarming rate. Since the Bank cranked up its QE printing press four years ago, the interest rate on High Street savings accounts has averaged under one-quarter of one percent. Over the same period the Bank has delivered an inflation rate well in excess of 3%, even higher than its official target of 2%. As a result the real value of your savings account has plunged by nearly 14%:

Just like HBOS, we trusted them with our savings, and they've repaid us with incompetence and recklessness.

What's that? They intended all this? They intended to crank up inflation and to whack savers? You mean... they've behaved even worse than Stevenson, Crosby and Hornby?

You know, now I come to think about it, you could be right. Here we are with a deeply indebted government, busted banks stacked high with dodgy assets, and millions of households who have borrowed more than they can ever afford to repay. A good dose of inflation would help them all, clearing their debts, and getting them back into the spending mood. Savers suffer of course, but hey, if savers won't spend their money, then they only have themselves to blame if they lose it to those who will.

The reality is that if you're sitting on a UK savings account today, you are a mug. All around the world central banks are intent on stoking inflation higher. The Fed and the Bank of England have been doing it for a while, and this week the Bank of Japan joined them: in the words of the FT, they have "opened the floodgates".

And it's not difficult to see why. The Japanese have had two decades of very sluggish growth, and the western economies now seem to be facing the same thing. The idea of a global savings glut has taken hold, with Chinese households now reportedly saving 50% of their incomes rather than recycling their soaring earnings back into consumption. China exports far more to the west than we export to them, which has the effect of sucking spending power out of our economies. The Chinese refuse to let their currency rise to its correct level, so they run a huge balance of payments surplus. The money comes out of the pockets of western consumers, into the hands of the Chinese central bank, and is then parked in US Treasury bonds and other financial assets back in the west. Rather than spending it, the Chinese just sit on it.

In the circs, nobody wants to see western savers also sitting on their cash - their patriotic duty is to spend it, and if they won't spend it, then they should not complain if it gets confiscated via inflation.

Of course, as world inflation cranks up, those Chinese savers will also lose. The real value of China's overseas assets will be eroded, and because of their fixed exchange rate, higher inflation outside China will spill over into China itself. Sooner or later the Chinese authorities will be forced to let the currency float up to its correct level - which is almost certainly part of the western agenda here.

But none of that is going to help UK savers. Ever higher inflation is on its way, and they cannot expect High Street interest rates to keep pace. Not for the first time, savers are being sacrificed to The Greater Good.

PS What would I do? Very tricky, but you need to get that cash into assets that have at least a chance of  protecting you against inflation: index-linked, equities, gold, and property. The problem is that prices are already pretty high across all those areas, and that old standby of Index-Linked National Savings Certs is no longer available (I wonder why).

PPS Long-time Labour insider Dennis Stevenson was of course the man Blair put in charge of choosing the People's Peers (see this blog). He brought his customary arrogance to that role, and not much seems to have changed. Once, long ago in a previous life, I attended a business lunch with him. He was keen that we understood he had the ear of the then PM, and he came across as... well, arrogant.

Wednesday, April 03, 2013

I'm Entitled

Yes, we know: we can't judge our entire welfare system on the basis of Mick Philpott. But what we can say is that if it hadn't been for our welfare system, he wouldn't have been able to live like that. He wouldn't have been able to get a living from fathering 17 children. There wouldn't have been any benefit in cramming two entire broods into his 3 bed Council semi to boost his income and his case for a bigger house. The incentive simply wouldn't have been there.

We've blogged the issue of children as meal ticket many times (eg following the Shannon Matthews case). And to some degree it is an inevitable consequence of any welfare system that seeks to protect poor children from the fecklessness of their parents: we pick up the tab because we don't want the children to starve. But we don't have to sit back and accept that such parents can just carry on being as feckless as they like.  

Yet according to the welfare administrators in Derby, there was nothing to flag up Philpott and his domestic arrangements as being a concern. In other words, it was deemed perfectly acceptable for him to carry on taking the money and fathering even more kids. All that mattered was that the kids were not obviously being abused.

Why? Why when Philpott was clearly able-bodied, was he allowed to spend his entire life sponging off the rest of us? Because he wasn't some unfortunate casualty of the recession: come rain or shine, boom or bust, he'd always expected us to support him, and our welfare system did absolutely nothing to stop him. Instead of making the dosh conditional on him, say, clearing the rubbish strewn around outside Mr Mundair's Derby shop (and all those other neighbourhood jobs that never get done) he was just given the money. 

This appalling case highlights once again how the culture of entitlement has ramped up our welfare bills. And lest we forget, welfare spending doubled in real terms between 1990 and 2010. Doubled to over £200bn.

In the case of Housing Benefit, that's grown even faster, nearly trebling over the same period. And once again, entitlement has been driving up costs - the entitlement of recipients not just to a roof over their heads, but to remain in the same subsidised accommodation irrespective of how many spare bedrooms they have. And judging from the outcry over the government's attempt to tighten the rules, that sense of entitlement is deeply felt and shared across large sections of the media. 

Yet the government's rule changes are pretty modest, with prospective savings amounting to less than 5% of the total £24bn bill. They will certainly not result in widows and orphans being cast out into the snow.* As for forcing children of the same sex to share bedrooms, I personally shared a bedroom with my two brothers right up until I finally left home in my early twenties - it was no hardship whatsoever. 

Of course, much of the reporting we get on these welfare changes is filtered and spun by the BBC. The R4 Today programme did a great job of stitching up poor old IDS on Monday, getting him to claim he could live on £53 per week. It later turned out that their case study - a market trader who claimed he only gets £53 per week to live on - was being somewhat economical with the actualit√©, but by then the damage had been done.  And that stunt was only part of the BBC's big campaign against welfare reform, and indeed all Coalition attempts to curb public spending.

Which is hardly surprising, given that the BBC is Britain's biggest tax-funded business. Accountable to nobody except themselves, they are as steeped in entitlement as any Mick Philpott. And they can see that if the rest of us start asking the right questions, it won't be long before their £3.5bn subsidy will be seen as a luxury we can no longer afford. Best to stop such questions being asked in the first place, and hope their guys get back in 2015.

*Denham Senior recalls witnessing the eviction of an elderly widow from her home in the early 1930s. She was carted off to what had once been the workhouse, and her possessions were piled up on the pavement for passers-by to help themselves to. Nobody is suggesting a return to that, or anything even close.

PS How long has the BBC been using our taxes to advertise themselves on YouTube? Personally I find much more to interest me on YT than on the BBC's six (six!) channels put together. Yes, there are ads - ever more ads - but I'd much rather put up with them than the BBC's telly tax... especially when it's being used to advertise on YT. 

Monday, April 01, 2013

Recent Bonfires - April Fools Edition

April 1st wind-ups

£4,800 for boob job - "WANNABE glamour model Josie Cunningham shows off her new 36DD boobs - served up on the NHS. Josie, 22, had a £4,800 breast op funded by the taxpayer after telling her GP that being flat-chested was causing emotional distress. The Leeds telesales girl said: “My new boobs have changed my life, now I want to be the new Katie Price". Despite earning just £9,000-a-year in telesales, Josie has made several trips from her Yorkshire home to get used to the celebrity lifestyle in London nightspots. She has also had chocolate brown highlights in her hair to copy busty Katie, begun a collection of Louis Vuitton handbags — and ordered a chihuahua puppy." (Sun 29-3-13)

£90k for prisoner sex change ops - "Two prisoners at a maximum security jail have used human rights laws to force taxpayers to foot the £90,000 bill for their sex-change operations. Both men are serving lengthy sentences at Full Sutton jail near York. Alongside the £45,000 cost of each operation, thousands more has been spent training guards to deal with the inmates’ new identities." (Express 22-3-13)

£16m for fatcat civil servants - "Fatcat civil servants at the Department of Energy were handed more than £16 million in bonuses and payoffs in the past two years. Taxpayers have funded exit packages worth more than £7.6 million since 2011, with some employees getting more than £100,000. And £9 million has been paid out in bonuses in the last financial year. Labour MP Pamela Nash said the payments were an “absolute scandal”. She said: “It is not surprising the Government are not tackling rising energy bills seriously when they can’t even control the bonuses.” (Mirror 30-3-13)

April 1st total - £16,094,800

(The joke being entirely on you)

Saturday, March 30, 2013

Facing Down The Unions

Impartial BBC journos off-duty

It's just like old times. The teachers are going on strike, the Post Office workers are going on strike, and even those most essential of essential workers, the BBC journalists are going on strike. The common theme? They're all employed by the public sector.

As you know, the public sector is the last bastion of British trade unionism: 60% of today's union members are employed in the sector, even though it contains only one-fifth of the workforce. And these unions will strike at the drop of a hat - even while Blair's government was busy ramping up their members' pay. 

Here's the latest version of a chart we've posted before. It shows the number of days lost to industrial action annually in the public and private sectors (the figures are rolling three year averages):

In the private sector, the number of days lost annually has fallen to around 100,000 pa, or roughly 0.004 days per employee. However, in the public sector it's running at 20 times that rate. Moreover, while private sector employees have stoically swallowed pay freezes and tougher working conditions since the Crash, public sector unions seem to think their members are entitled to same rewards as during the time of plenty. There is no acceptance that the world has changed, and hence this fresh wave of strikes.

Of course, the Coalition did impose that two year pay freeze, but as we blogged here, in reality that turned out to be a freeze in name only. Depending on how you measure it, pay increased by between 5 and 10% over the two years, and it's still increasing. Moreover, public employees are already paid getting on for 10% more than their private sector equivalents, on top of which they get those famous index-linked pensions that are simply not available elsewhere. As we estimated in the BOM book, the total reward gap could be as much as 30 to 40%. Even after recent pension reforms kick-in, it will still be well North of 20%. 

But credit where credit's due: the Coalition are certainly having a go at addressing the issue. They have reformed the public sector pension schemes to make them less generous, and although there's more to do, over time their reforms will save taxpayers some serious cash. 

And they are now tackling the issue of progression pay - the automatic annual pay increments received by a substantial proportion of public employees. Virtually unknown in the private sector, incremental scales deliver year-on-year pay rises irrespective of freezes or indeed individual performance. George says:
"We will seek substantial savings from what is called progression pay. These are the annual increases in the pay of some parts of the public sector. I think they are difficult to justify when others in the public sector, and millions more in the private sector, have seen pay frozen or even cut."
Quite right George (and yes, we do realise Chancellors have never enjoyed such increments, and you haven't had a pay rise for three years).

But it's going to be a helluva battle, with the teaching unions already launching an all-out assault on the Gove Line. The Association of Teachers and Lecturers passed a vote of no confidence in him and his Chief Inspector earlier this week, and the NUT is following suit. A protracted series of strikes looks well on the cards.

The Coalition must stay strong on this. Closing the public sector pay and pensions gap will ultimately save taxpayers at least £25bn pa. And although it will obviously be painful for public sector employees, they should understand it's a lot less painful than the Irish solution. There, public employees had to accept pay cuts averaging 15%.

PS Did anyone miss the BBC journos who went on strike last week? It should have encouraged more people to try out Sky News, and I suspect a good proportion will not return. A few more outages like that and even Mr Cam might start thinking about break-up and sale. Let's hope so. 

Thursday, March 28, 2013

Problems With The Roller

This may never turn into a Rolls Royce

Now don't laugh, but there used to be a theory that the Civil Service was a finely tuned Rolls Royce. Ministers had only to point it in their chosen direction, settle back in the plush leather seats, and leave the purring giant to convey them effortlessly down the road.

Of course, it was never actually like that in practice, but for politicians keen on expanding the scope and reach of government it was a useful and comforting myth. Attlee's New Jerusalem government reckoned Civil Servants were capable of managing everything from the commanding heights of the economy right through to the allocation of bedpans in their newly nationalised health service. Wilson's government pushed up the proportion of our economy under Whitehall management from 35% to 45%. And we all know what the Blair/Brown government did.

But if your base your approach on a myth you end up with a disaster. And far from settling back in the Connolly leather, ministers spend most of their time flat on their backs under the car wrestling with the transmission.

And this week we've got two very good examples.

First, the latest attempt by a Health Secretary to stop the dysfunctional NHS killing so many of us. The bureaucrats at the Department of Health having failed to come up with anything other than more paperwork, Jeremy Hunt is issuing his own Orders of the Day.

Order Number One. All hospitals and care homes will be officially rated by a the new Chief Inspector of Hospitals.

Order Number Two. Any state healthcare operative who fails to freely confess his own shortcomings will be shot. Well, maybe not shot exactly... but their employing organisation will be given a jolly good talking to.

Order Number Three. Before they qualify, all student nurses must spend a year... well, let's say "up to a year", actually doing some nursing with real patients.

Mmmm... no matter who's sitting in the big leather chair, the NHS just goes on fighting the Battle of Stalingrad. As we've blogged many times (eg here and here), running a huge organisation through top-down orders and fear may have worked for Stalin in 1942, but he wasn't trying to save lives (other than his own of course). In the NHS it's been a total flop: successive Health Secretaries have tried it, and it simply doesn't work.

As for the new Chief Inspector of Hospitals, he's only being introduced because Labour's Care Quality Commission has failed. And the Care Quality Commission itself was only introduced because its predecessor, the National Patient Safety Agency, also failed. A government regulator regulating a nationalised industry is always going to be the public sector marking its own homework. And while the Government Inspector may strike fear into the hearts of employees - witness the hatred of Ofsted among many headteachers - that's because the regulator becomes an instrument of Commissariat control rather than an objective assessor of standards.

And who ever thought it was good idea for nurses to qualify without having a hands-on apprenticeship of feeding and washing patients? When my Mum trained as a nurse back in a flagship pre-NHS hospital, one of  her duties was to make sure the patients in her care were eating and drinking properly: years later she still recalled being pulled up by matron for not cutting the crusts off some old boy's sandwiches. It was the Department of Health - miles away from the sharp-end of patient care - that later ruled that wasn't part of a nurse's duties.

Meanwhile our energetic Home Secretary has announced that she's breaking up Labour's useless £1.6bn pa UK Border Agency. The UKBA has become a byword for ineptitude, with among other things, an immigration case backlog well in excess of 300,000 cases.

According to Mrs May, creating this gigantic immigration super-quango may have looked neat on paper but in practice it was disastrous :
"First, the sheer size of the Agency means it has conflicting cultures, and all too often focuses on the crisis in hand at the expense of other important work. Second...UKBA was given agency status in order to keep its work at an arm’s length from ministers. That was wrong. It created a closed, secretive and defensive culture. The new entities will not have agency status and will sit in the Home Office, reporting to ministers."
This echoes two points we've long made on BOM - one, that bigger is almost always worse, and two, that delegating power to arms length quangos means rule by bodies unaccountable to anyone, let alone us poor schmucks out here paying for it all.

So good for Mrs May.

But not so good for Mr Hunt.

Because although both of them are attempting to fix the broken old jalopy of of Civil Service management, Mr Hunt ought to be trading it in for a superior model.

With border control Mrs May has little choice but to somehow get her Civil Servants working better: protecting our borders is an essential function of government, and she can't turn it over to others. She has to make it work, however hard that is.

But healthcare is something else entirely. It's not an essential function of government, and Hunt should be learning from the workings of superior systems elsewhere. The European Social Insurance systems put customers in charge via their freedom to choose between competing providers. In all likelihood their Civil Servants are no better than ours at running things, but it doesn't matter because they're not required to do so.

Unless we can shrink government back to its core functions we will never enjoy the standards of service we're already paying for. No matter how hard ministers may try, you simply can't build a Rolls Royce from the bits off an old Austin Allegro.

Monday, March 25, 2013

Plan B Kicks Off

Get used to this

So here we are with a government spending far more than it can raise in revenue, building up a catastrophic pile of debt, and facing an election in just two years time. Spending cuts are needed to balance the books, but more cuts this close to an election just ain't gonna happen. What on earth can be done? George is prepping Plan B.

George's Plan A is to pray for growth, and in both the 80s and 90s it was a resurgence of growth that came to the fiscal rescue. Unfortunately, with debt overhangs and busted banks all around us, we're now in a much more difficult position than we were back then. The growth rescue looks to be way off, and George knows it.

Which is why he's now busily working on Plan B. It's the traditional plan for over-borrowed governments everywhere, and its ingredients are as follows:
  1. Engineer higher inflation by printing money - in an open economy like the UK it's quite easy because currency depreciation soon gets prices moving up.
  2. Fail to index tax thresholds in line with higher prices - that boosts income tax revenues as earnings respond to higher prices (aka fiscal drag), adding to the higher revenues flowing from VAT. 
  3. Limit spending in cash terms- hold spending departments to strict cash limits.
Over the last several months, George has taken action on all three components.

First, he confirmed in the Budget that under his new flexible friend Governor, the Bank of England will no longer be restricted to a 2% inflation target. In future, it will be allowed to set itself "intermediate thresholds", such as keeping "interest rates low while unemployment is high, provided inflation is not expected to rise too much". How much inflation is too much? That's for him and the Governor to choose, and you to fret about as you watch your savings disappear down the plughole.

Second, he's increasing the higher rate income tax threshold by only one percent a year, even though inflation is running much higher. The £150,000 threshold at which the top rate of income tax applies is frozen altogether, as is the £100,000 threshold above which the personal allowance starts being clawed back. The higher is inflation, the more harshly these measures will bite, with around half a million additional taxpayers being dragged into higher rate tax over the next two years. Similarly, the threshold for Inheritance Tax has been frozen at £325,000 since 2009.

Third, he announced in the Budget a huge increase in the scope of departmental cash limits. He said:
"The public spending framework introduced by the previous government divided government spending into two halves: fixed departmental budgets and what is called Annually Managed Expenditure. Except in practice it was annually unmanaged expenditure – and it includes almost the entire welfare budget as well as items like debt interest and payments to the EU.  
We will now introduce a new limit on a significant proportion of Annually Managed Expenditure. It will be set out in a way that allows the automatic stabilisers to operate – but will bring real control to areas of public spending that had been out of control."
Exactly how it's going to work is unknown, but the intention is clear enough. And it promises a revolution in the way that welfare spending is controlled. Because instead of pre-committing to pay whatever bill the agreed rates of welfare benefit generate, he's saying the total amount will be cash limited. Benefit rates and entitlement rules will have to be flexed to fit within a cash ceiling, and that will have to include upratings to cover inflation.

As for debt, higher inflation will obviously erode the real value of government obligations fixed in cash terms, notably its issues of so-called conventional gilts. True, its index-linked gilts will have to be adjusted in line with the higher inflation, but since they only comprise one-quarter of total gilt issues, the Chancellor comes out well ahead.

Of course, there is a serious risk that what he gains on the debt erosion swings he will lose on the debt interest roundabouts. If the markets lose confidence, as they did when a similar scam was tried back in the 1970s, interest rates on new gilt issues will shoot up and debt servicing costs will take off. Even so, because the existing stock of debt has such a long average maturity, it will take a couple of decades before the full impact is felt.

So that's Plan B. And it's worth noting what the world's most successful central bank ever has to say about it:
"Government debt fosters the risk of inflation. Central banks, too, are usually exposed to the strong pressure that burdens states with high levels of debt. This is because the higher the pressure on the government to get the public debt under control, the greater is the temptation to exert pressure on the central bank to lower interest rates via monetary policy measures... 
If, in order to safeguard its solvency, the government pressures the central bank to set a lower interest rate than is compatible with price stability, demand increases too quickly, and this ultimately leads to higher inflation. In this case economists speak of a regime of fiscal dominance: interest rates are no longer set according to the requirements of price stability but instead are dictated by the state’s need to reduce its financing costs. 
Measures taken by central banks in the past, under the influence or control of the state, to lower interest costs or to reduce the overall debt burden, have ranged from straightforward interest rate reductions to purchasing government bonds in secondary markets and to direct monetisation of government debt.  
To be able to resist this political pressure, central banks have traditionally been granted a high degree of independence. This was, among other things, a response to the experiences of the 1970s and 1980s. This era of oil price shocks posed a major challenge to monetary policy-makers. It became apparent that countries with independent central banks had much lower inflation rates – and similar or even higher growth – than countries whose central bank was answerable to the government.  
Central bank independence is therefore essential to inspire confidence that the central bank will keep inflation low. However, a high government debt burden can generate doubts about its actual independence and undermine its credibility, even if it has not actually changed its monetary policy course. Once doubts arise about of the monetary policymakers’ capability to defend their independence against political interference, they risk losing control of inflation expectations and thus over inflation itself."
That's the Deutsche Bundesbank speaking - the rock-solid guardian of German economic stability right up to   when the Germans were bounced into the Euro.

My advice? Get down to the building society, draw out all your cash, and get yourself some of these:

Yes, I know - easier said than done. Personally I'm going to contact the Major's old mucker Mr Gomulka who apparently has a lock-up full of them.

Saturday, March 23, 2013

Another Slice Of Salami Sir?

Glad someone's enjoying this

Long-time readers will know that the 2012 Olympics smashed the world record for salami slicing (see all 2012 posts gathered here).

The first slice - served up when we originally pitched for the thing - was a mere £2.375bn. But after landing the gig, the cost suddenly ramped up to £9.3bn, a fourfold increase. We later discovered the original costing had been cobbled together during a late night Withnail drinking contest down The Stoat and Weasel, but the process bore all the classic grease-marks of ripe salami. That's where project costs are deliberately low-balled so as not to scare taxpayers. One international study found that 90% of such projects overrun their initial budgets:
'The study concluded that lying, or intentional deception, by public officials was the source of the problem: “Project promoters routinely ignore, hide, or otherwise leave out important project costs and risks in order to make total costs appear low.” Politicians use “salami tactics” whereby costs are only revealed to taxpayers one slice at a time in the hope that the project is too far along when true costs are revealed to turn back.'
And in the case of the Olympics, the slices are still being piled on our plate months after the wretched thing ended. So yesterday we learned that taxpayers are being forced to shell out another £150bn - £190bn to convert the white elephant Olympic Stadium into a football ground for West Ham. Well, OK, £15m of that will come form West Ham, but for that we're giving them a £600m+ stadium.

It really does make you want to spit, even if Boris reckons it's the best deal available in the circs. Because if the arrogant Tessers originally in charge of the project had ensured the stadium could be used for football, we wouldn't now need to swallow this additional slice. Even a non-sporty potato like me understands that football is the only sport that could sustain such a monster, yet that point was clearly beyond Her Ladyship Tessa J. Even though her own Sports Minister says he explained it to her:
"The mistake was made in 2006/7 when they ruled football out of a retro-fit design as we had done successfully in Manchester with the Commonwealth Games stadium. I suggested retractable seating like the Stade de France in Paris but they insisted it should be a 25,000-seat athletics stadium. Time and again mistakes are made with Olympic Stadiums and the lessons should be learned for any future similar projects."
Lessons being learned for the future.

If our high spending politicos could learn lessons for the future, I doubt I'd be writing this blog. Value for our money never trumps political grandstanding, and grandiose projects like the Olympics offer the most imposing grandstands of all.

Friday, March 22, 2013

The Overspend Gets Bigger

See you at the airport

So what do we make of the budget?

Given his starting point, George did a reasonable juggling job, and managed to sound as if he's serious about getting the economy moving again. His moves on company taxation and fuel duty are welcome, if relatively small... er... beer. His fresh attempt to inject life into the housing market is also potentially helpful, although we need to see more detail before we can be sure it won't simply re-inflate the property bubble and/or expose taxpayers to a huge Freddie and Fannie style default crisis. 

However, looking at the big picture, he failed once again to tackle the rampaging elephant that's still smashing up the fiscal room. That is, he did nothing to bring government spending back down into line with sustainable tax revenues.

Yesterday I took part in a TPA/IEA panel discussion on the budget, and the excessive level of public spending was by far the main concern for both panellists and audience. Unfortunately, nobody could see the current government gripping it this side of the 2015 election, and a Miliband government - with or without the Lib Dems - won't even try. 

By the end of the session I was ready to book a one-way ticket to... well, to where exactly? Cyprus would now appear to be out, and Mrs D's arachnophobia rules out the more exotic destinations. Must get back to researching it.

The following is a summary of my own presentation (some bits are updates of recent blog posts, and I'm afraid there are quite a lot of numbers).

As the Chancellor highlighted in his speech, government departments have been significantly underspending against their original budget allocations. The underspend for 2012-13 is now put at £11 billion, an unprecedented shortfall which has narrowly prevented this year's borrowing increasing above last year's (£120.9bn vs £121.0bn). However, of much more significance is the continuing overspend against the government's revenue base, a problem he did not address in the budget.

The Coalition's first budget in June 2010 set out a path for public spending that saw it rise from £669bn in 2009-10 to £757bn in 2015-16, an increase of 13%. Given the urgent need for fiscal consolidation, many commentators - including the TPA - thought that not nearly tough enough. However, it was justified on the basis that economic recovery would boost revenues and close the deficit, just as it had done after the recessions of the early 1980s and 1990s.

Unfortunately, that hasn't happened. Growth has been feeble, and the economy is now (2012-13) 4% smaller than it was forecast to be back in 2010. Worse, according to the OBR's latest forecasts, the shortfall is expected to go on getting bigger, reaching 7% in real terms, and 9% in cash terms, by 2015-16. Over the whole of this Parliament (2010-11 to 2015-16), the OBR now reckons the economy will grow by just 6%, compared to its June 2010 forecast of 14%.

Relative to our economy and its capacity to bear taxation, government overspending is even worse than it appeared in June 2010.

Spending still planned to increase

The following chart shows spending in cash terms (Total Managed Expenditure - TME) since the start of Labour's reckless spending surge. As we know, that surge more than doubled spending in cash terms and even in real terms increased it by one-half. From 2009-10, it compares three plans:
  • Labour's final plan
  • The Coalition's first plan - June 2010
  • The Coalition's latest plan - March 2013 

Key points to note:
  • All three plans incorporate a sharp slow-down in growth from the surge years, but there's not a huge difference between them. 
  • Spending in 2013-14 is now planned to be £720bn - almost exactly in line with the £722bn "spending envelope" set out in June 2010. Which in the narrow terms of public spending control is pretty precise management, and much better than most previous governments have managed.
  • However...
...because economic growth and revenue have both fallen well below what had been expected, as a percentage of GDP spending has turned out higher than planned, and revenue much lower. Spending is now running at 45% of GDP, a mere two percentage points lower than what the Coalition inherited back in 2010. Revenue will once again fall well short of spending, at 38% of GDP, leaving government borrowing an unsustainable 7%.

Spending already far too high

The following chart puts the budget spending and revenue forecasts into context, again showing the entire period from 2000-01 through to 2017-18. The gap between the two lines represents government borrowing.

Key points to note:

  • Since the privatisation of Britain's big nationalised industries (which removed a large chunk of trading profits from public sector revenues), no government has managed to raise revenues of more than about 38% of GDP: that seems to be the limit on what is politically acceptable and economically sustainable. 
  • The public spending envelope remains substantially oversized relative to sustainable revenue. 
  • The projected convergence of spending and revenue over the next five years depends crucially on the OBR's growth forecast being realised. 

The OBR is forecasting average growth over the next five years of 2.1% pa. Given recent growth performance, the continuing problems in Europe, our broken banks, and high energy prices, that may well turn out to be optimistic. If so, the convergence of spending and revenue may not happen at all.

Return to the 70s? 

For example, if instead of 2.1% pa growth, we get a prolonged period of 0.5% pa 1970s style growth, the gap remains stuck at 7% of GDP*. All of which will have to be borrowed.

In its first three years the Coalition has already increased the official government debt (PSND) by well over £400bn. By 2017-18, even on the OBR's forecasts, their increase will be nearly £900bn - more than doubling the debt total they inherited. And the official debt is only one small part of the government's overall liabilities.

Debt piled on debt

According the Office for National Statistics, the government's overall liabilities amount to well over £7 trillion, equivalent to five times GDP. The following chart shows the main components:

Interest on the official national debt is currently running just under £50bn pa. The OBR now forecasts it will increase to over £70bn by 2017-18. 

However, all of the government's liabilities require servicing, and if we add in those public and state pensions payments, along with PFI payments, total debt servicing is already running at £170bn pa, and is set to increase to £220bn by 2017-18. 

That means that by 2017-18, over 30% of government revenues will be earmarked to service past liabilities rather than to pay for current services.

Public spending that doesn't add up

With an increasingly large chunk of public spending earmarked for debt servicing, and NHS, Schools, and Aid spending protected inside their preposterous ring-fence, only around one-third of the spending is available for cuts. Nobody has a clue how that can be done inside George's existing spending envelope, including George himself. 

If we don't get a big shot of growth soon, we are facing a massive spending crunch. Forget public sector pay and benefit freezes: we are talking Irish-style 15% across the board cuts for everything. 

*Note I have calculated the impact of lower growth on the public finances using the OBR's own ready reckoner. It's almost identical to the old Treasury rule of thumb blogged here, and it says that a one percentage point shortfall in GDP raises public sector borrowing by 0.7% of GDP after two years. That comprises 0.5 percentage points on the spending ratio, and 0.2 percentage points off the revenue ratio.

Tuesday, March 19, 2013

The Spending Problem

It's almost certain that tomorrow's budget projections will incorporate yet another downgrade to growth expectations. Which means that the current plans for public spending have become even less affordable.

Since George's' first budget in June 2010, the Office for Budget Responsibility (OBR) has downgraded its growth forecasts almost every time it's opened its mouth. For 2015-16 - the last year of the current Parliament - it originally forecast GDP would be £1902bn. By last December, it had cut that to £1763bn, a reduction of over 7%. Some of that is accounted for by lower projected inflation (amazingly), but most reflects a real terms GDP reduction of 6%.

So by 2015-16 our national income will be 6% less than George expected back in June 2010. Yet far from trimming his spending budget, he's still planning to spend almost as much.

Back in June 2010, spending in 2015-16 was projected to be £757bn (Total Managed Expenditure - TME). So if he'd cut his cloth in line with the poorer outlook for national income, he should now be planning of spending closer to £700bn. Instead of which, spending is actually projected at £745bn.

Here's a chart of successive spending projections (TME). The top line is Labour's final effort (projection out to 2014-15), the others are successive coalition plans:

As we can see, the June 2010 budget cut Labour's planned 2014-15 spending by 5% in cash terms. And as we can also see, the latest coalition plans have cut it a little further (by about one percent). That's all to the good, but the problem is that with the outlook for GDP so much worse than George initially thought, it needs to go further.

When the coalition took over, public spending was running at 47% of GDP. That was far higher than government revenues at 37%, and wholly unsustainable: as ministers kept telling us, it meant government was borrowing one pound in every four it spent. The plan was to get public spending down under 40% of GDP by 2015-16, and to increase revenues to 39%. Which they reckoned would leave borrowing at a comfortable level.

Unfortunately, things haven't panned out like that. With weaker growth, revenue is falling short and borrowing is significantly overshooting.

Of course, there are plenty of people who say we could solve the problem without further spending cuts. For example, we could tax the rich: except as we've blogged many times, there aren't enough of them. Moreover,  we should note that no government in at least the last 50 years has ever managed to raise much more than about 38% of GDP in tax revenues - that seems to be the limit of acceptability and/or practicality (see BOM book).

Or maybe we could borrow more. Except with inflation a looming problem, and Sterling subject to attacks of the vapours, those fickle bond and currency investors could well take it the wrong way. Especially when we understand that the only reason the coalition's spending totals have stayed within their initial projection is that debt interest has so far been lower than forecast (saving an expected £9bn next year alone). We really cannot afford to upset the gnomes of Zurich, or anywhere else.

But surely, you say, once the economy recovers back to full strength, revenue will rise and these problems will take care of themselves.

Yes, if only.

The problem is that we can't be at all sure what full strength means any more. Back in 2008 the economy suffered a heart attack, and although the jump leads got it back upright again, it's still hobbling around and avoiding strenuous exercise. It may no longer be capable of scaling the peaks it sprinted up during its Ben Johnson years of unlimited debt steroids.

The OBR tries to work out if and how quickly we can expect a full recovery, by assessing potential output both now and in the future. But it's the first the recognise the problems:
"The amount of spare capacity in the economy (the ‘output gap’) and the growth rate of potential output are key judgements in our forecast. Together, they determine the scope for actual growth as activity returns to a level consistent with maintaining stable inflation in the long term. The size of the output gap also determines how much of the fiscal deficit at any given time is cyclical and how much is structural. In other words, how much will disappear automatically, as the recovery boosts revenues and reduces spending, and how much will be left when economic activity has returned to its full potential. The narrower the output gap, the larger the proportion of the deficit that is structural, and the less margin the Government will have against its fiscal mandate, which is set in structural terms... 
But neither the level of potential, nor the pace of recovery, are possible to estimate with confidence, not least because the former is not a variable that we can observe directly in the economic data."
Here's its summary table on potential output growth:

Many people (probably including the OBR) wonder if they are being too optimistic on these key judgements. For example, it assumes that the potential growth of labour productivity in the future will be 1.9% pa, whereas the average growth over the last 15 years is only 1.4% - and since 2008 it's actually fallen.

The horrible reality is that the economy now looks a lot weaker than when the coalition came to power. And with a weakened poorer economy we cannot afford to maintain their initial spending plans. GDP is going to be much lower than he assumed then, but he hasn't cut his spending plans. George needs to recognise that tomorrow and tell us how he's going to address the problem.

Sunday, March 17, 2013

Our Scary NHS - 3

Maybe he should have a crack at the NHS

According to government health adviser Professor Sir Brian Jarman, ministers and officials could have saved at least 20,000 lives had they listened to his warnings over dangerous NHS hospitals.

Jarman is the co-founder of the Dr Foster company, which provides comparative information on health and social care services. Among other things it produces statistics on hospital mortality rates (Hospital Standardised Mortality Ratios - HSMR) that flag up hospitals with significantly higher levels of mortality than the average. Jarman says their stats identified the problem at mid-Staffs long before any official action was taken, and similar issues at other hospitals now finally being reviewed by the government. He says:
“Those hospitals which had persistently high death rates over all those years and have now been listed for investigation should have been investigated earlier, because it’s quite possible we would have had fewer deaths in those hospitals... [there] must be at least tens of thousands of avoidable deaths in those hospitals alone, when we should have been going in and we should have been looking at them”.
In just the 14 hospital trusts* now being reviewed by the government, he reckons excess deaths number "a bit over 20,000".

This is bad enough. But even worse is the fact that even when Jarman flagged up his concerns directly to Labour Health Secretary Andy Burnham, nothing was done. In March 2010 he sent Burnham a list of hospitals with significantly high death rates and nothing happened. Nothing.

It's not hard to see why. Because March 2010 was just two months before the last election. No way would Burnham - or any other Health Secretary - have wanted that blowing up during the campaign. With politicians at the controls, patient safety must always come second to political imperatives.

Not that Burnham ignored Jarman outright. According to Burnham's own account, he referred the matter to the Care Quality Commission, who "did not find that there was anything to worry them". Further, Jarman's HSMR data was "new" and "the government could not put it's full weight behind it".

Hmm. Here we have an officer of the state, warned that his state owned industry is going seriously off the rails, and relying on his own state commission and own state statistics to check it out. Does that sound like a recipe for customer safety?

Now, nobody's saying Burnham's a bad man. True, he's a politician, but just like every other Health Secretary in living memory he found it impossible to manage our huge NHS to deliver as he (and his customers) would have wished. He found himself as one against one-and-a-half million staff, staff who know far more about their business than he could ever hope to find out. And if his managers choose to tell him there's nothing to worry about, how can he possibly hope to find out what's actually going on down at ward level? As always, information is power.

Which is why the current Health Secretary, Jeremy Hunt, is now making it a criminal offence to fiddle NHS stats. In future, anyone cooking the figures for hospital mortality, or waiting lists, or anything else in the NHS, will face a jail sentence and their employing trusts will be fined millions. Hunt says:
“This is about a transparent, honest and accountable NHS. Patients and the public should be confident that they can trust information about how hospitals are performing, and a culture of honesty and accuracy will help those organisations drive up standards of care."
A new culture, yes, that's what we need all right. But can criminal sanctions deliver it? Out East, they have plenty of criminal sanctions to support the right culture - and we're talking sanctions that are a tad more bracing than three months in Ford Open Prison. Yet their new management team inherits a state behemoth with all the NHS problems plus a few more besides.
"President Xi Jinping told the nearly 3,000 delegates gathered at Beijing’s hulking Great Hall of the People that his government would “resolutely reject formalism, bureaucratism, hedonism and extravagance, and resolutely fight against corruption and other misconduct in all manifestations.” Shortly afterward, freshly appointed Premier Li Keqiang said the central government would slash its payroll and freeze spending on overseas trips, guest houses, office buildings and new vehicles in response to falling revenues. “The central government will lead by example and all local governments must follow suit.”
Formalism, bureaucratism, hedonism, extravagance, corruption, and other misconduct in all manifestations. Well, maybe the NHS hasn't quite ticked all of those boxes yet, but on my count it's done at least four out of six.

Good luck to the reformers, both out East and here in the NHS. But meaningful reform in big organisations whose customers have no choice is next to impossible.

*Just so you know, here are the 14 hospital trusts now under review for having significantly higher than average death rates:

Saturday, March 16, 2013

How Big's The Deficit?

Rather bigger than we're led to believe

Dave and George have long boasted about cutting the deficit by a quarter. And if you look at the official numbers, they're right: over their first two years (2009-10 to 2011-12), Public Sector Net Borrowing fell from £159bn to £121bn, equals 24%.

But as you may have seen elsewhere, everybody's authoritative fiscal expert - the Institute of Fiscal Studies (IFS) - now reckons there's a greater than 50% chance that borrowing will go back up again this year. So despite the boasts, and despite all that "austerity" the BBC keeps banging on about, borrowing is actually going up.

Well, when we say borrowing's going up, what we mean  is that it's going up if we strip out a couple of fiddles George has inserted to make sure that the headline total goes down.

Fiddle 1: This year's investment spending total has been artificially reduced by netting off £28bn of investment assets transferred in from the Post Office pension fund. That transfer arises from the government's decision to take direct responsibility for paying retired postman their pensions, so it is very far from being free money. It is a one-off receipt against which taxpayers are now on the hook for a liability well in excess of £28bn. Yes, it's another one of those off-balance sheet jobs that G Brown used to do so well.

Fiddle 2: Government income has been artificially increased by taking into the Treasury's coffers the interest receipts earned by the Bank of England from its Quantitative Easing (QE) programme. As you know,  the Bank has bought £375bn of interest earning assets (mainly government gilts), and had been keeping the income in its own accounts. Now George is taking it, which will cut borrowing by an estimated £6.4bn this year. And yes, that's another stroke that reduces borrowing today, but increases it tomorrow - almost certainly by a lot more than today's reduction.

In fact, the QE programme could end up costing taxpayers quite a lot. Because at some stage, the Bank will have to put the programme into reverse, selling all those gilts it has been buying since 2009. If gilt prices have fallen by then, it will make a capital loss. And gilt prices are highly likely to have fallen because there will be a major seller in the market (ie the Bank), which had previously been a major buyer: instead of propping up prices, the Bank will be undermining them. True, the Bank itself currently reckons the price falls will not be sufficient to wipe out the gains previously made. But in reality, by the time of the sales, inflation is likely to be a whole lot higher than now. Which means interest rates will have ramped up, gilt prices will have crashed, and taxpayers will be on the hook for tens of billions of losses.

Stripping out these fiddles, the IFS reckons that government borrowing is set to increase from £121.4 billion in 2011–12 to £125.4 billion in 2012–13 (or from 7.9% to 8.0% of national income).

As for government debt, during those 13 years of Labour profligacy, the official national debt increased by just over £400bn. Under the Coalition, in just 5 years, debt is projected to increase by around £600bn. Absolutely effin' brilliant.

Of course, there are plenty of people who will tell you we needn't worry about high government borrowing or mounting debt. We're in the middle of the biggest recession since the 30s, and government needs to keep up spending to get us through. Government borrowing may be high in the short-term, but once the economy recovers, tax revenues will come pouring in, spending can be throttled back, and the government finances will be back in the black. So stop worrying!

Sounds great, but how can we be sure the economy will recover enough to do that? If the economy doesn't recover, then tax revenues won't come pouring in, and we won't be able to throttle back on spending. We'll just go on building up a bigger and bigger national debt, until something goes bang. And we most assuredly wouldn't enjoy that.

Economists attempt to get a handle on this by distinguishing between the government's actual budget deficit and what's known as its structural deficit. And indeed, George's main fiscal rule is to eliminate the structural deficit on current spending by five years in the future.

The idea is that the year to year deficit is driven in large part by the temporary effects of the economic cycle, and to get a proper fix on its underlying fiscal position we need to strip out those effects, which will correct themselves as the cycle reverses. That is, as we enter the upswing, tax revenues will automatically grow, and social security spending will automatically fall (the famous automatic stabilisers).

Last December the Office for Budget Responsibility (OBR) estimated that public sector borrowing next year (2013-14) will be about £100bn. And of that £100bn, getting on for £40bn will be temporary cyclical borrowing, the stuff we don't need to worry about.

So straight away we can see that £60bn is not temporary. And of that, well over half is current spending (ie it's not investment). Which is spending we need to rein in soonest.

Moreover, although in theory it's easy to distinguish between the structural and the cyclical components of the deficit, in practice, it's very hard. Nobody actually knows how much of our current economic weakness can be put down to temporary factors, and how much represents a permanent state of affairs. Nobody knows how much of the downturn is cyclical and will reverse, and how much is a loss of all that frothy unsustainable business that built up during the Brown bubble.

The cyclical shortfall between the actual level of output in the economy and potential output is known as the output gap. For 2012, the OBR estimated that the gap was about 3%. However, outside analysts reckoned it could be anywhere between 1% and 5%:

Without going into all the arithmetic, that range of opinion on the output gap translates into a range of opinion on next year's structural deficit running from £40bn up to £90bn. At the high end, that implies that nearly all of next year's deficit will be permanent: it will not automatically disappear as the economy recovers back to its full potential output.

So where's borrowing now?

We'll get the latest detail in George's budget next week, but net of fiddles, it looks very much like it's increasing. It's likely to be higher this year than last, and looking forward, those so-called automatic cyclical factors may not bring it down nearly as fast as many hope.

Spending cuts, George. More of them, and soon.